The Typical Three-Round Comment Cycle from the Listing Division on an IPO Application

The Hong Kong Exchange (HKEX) Listing Division’s review process for an IPO application has, in practice, tightened considerably since the introduction of the Listing Committee’s enhanced vetting procedures in mid-2024. For applicants and their professional teams, the path from submission to hearing is now almost universally defined by a structured, three-round comment cycle. This shift, driven by the Exchange’s mandate under the Listing Rules to ensure a “fair, orderly and efficient market,” means that a failure to anticipate the depth and sequence of these queries can add months to a listing timeline. For a sponsor or issuer, understanding the specific regulatory territory of each round is no longer a matter of best practice—it is a prerequisite for a viable timetable.

The First Round: Structural and Threshold Compliance

The Listing Division’s initial comment letter, typically issued within 10 to 15 business days of the A1 submission, is the most comprehensive. Its primary function is to verify that the application meets the fundamental eligibility requirements under the Main Board Listing Rules (Chapter 8) and that the disclosure in the draft prospectus is sufficient to allow a substantive review.

Profit, Market Cap, and Management Continuity Checks

The first round will rigorously test the applicant’s compliance with the quantitative listing criteria. For a standard Main Board applicant relying on the profit test under Rule 8.05(1)(a), the Division will demand a line-by-line reconciliation of the audited financial statements to the profit figures disclosed in the application proof. A common point of friction is the treatment of non-recurring items. The Exchange’s published decision HKEX-LD104-2023 explicitly states that gains from the disposal of assets or one-off government grants cannot be included in the calculation of “profits attributable to shareholders” for the purpose of meeting the HKD 35 million profit requirement over the three financial years. The sponsor must provide a clean, audited trail that isolates these items.

Furthermore, the Division will scrutinise the management continuity requirement under Rule 8.05(3). The applicant must demonstrate that the same management team has been in place for at least the three preceding financial years. If a key director or senior manager departed within that window, the first-round comments will request a detailed explanation of the circumstances, the successor’s qualifications, and a justification for why the continuity condition is still met. The burden of proof rests squarely on the sponsor to show that the departure did not alter the company’s strategic direction or operational control.

VIE and PRC Regulatory Structure Scrutiny

For any applicant with a Variable Interest Entity (VIE) structure, the first round is where the Listing Division applies its most stringent structural review. The Exchange’s 2023 Guidance Letter (GL94-18, updated in 2023) requires that the VIE structure be the “only feasible option” for the applicant to operate in a restricted foreign investment sector. The first-round comments will demand a legal opinion from a qualified PRC law firm that explicitly identifies the relevant negative list provisions, confirms that no alternative direct ownership structure is permissible under PRC law, and maps the entire contractual chain from the listed entity (typically a Cayman Islands holding company) down to the PRC operating subsidiaries.

The Division will also cross-reference the applicant’s VIE structure against the latest circulars from the China Securities Regulatory Commission (CSRC). Since the CSRC’s filing requirements for overseas listings came into full effect on 1 March 2023, the Listing Division has consistently asked for confirmation that the applicant has either completed or is in the process of completing the CSRC filing. Any sign of non-compliance with PRC regulatory requirements at this stage will result in a firm hold on the review process until the filing is confirmed.

The Second Round: Business Model, Industry, and Risk Deep-Dive

After the applicant has addressed the structural and threshold issues, the second round of comments—usually issued 4 to 6 weeks after the first response—shifts focus to the substance of the business model and the specific risks inherent in the applicant’s industry. This is the stage where the Division’s analysts act as industry specialists, not just compliance checkers.

Revenue Recognition and Customer Concentration

The Division will dissect the applicant’s revenue recognition policy against the requirements of HKFRS 15. For a technology or platform-based company, the second-round comments will often ask for a breakdown of revenue by performance obligation. If the applicant recognises revenue from a multi-element arrangement, the Division will request the sponsor’s detailed analysis of how each element’s stand-alone selling price was determined and why the allocation is appropriate.

Customer concentration is another major area of focus. Under Listing Rule 8.07, the Exchange may consider an applicant unsuitable for listing if it is “unduly dependent” on a single customer or a small group of customers. The second-round comments will typically require the applicant to disclose the percentage of revenue derived from the top five customers for each of the three years under review. If any single customer accounts for more than 30% of revenue, the Division will request a sensitivity analysis showing the impact on the business if that customer were lost, along with contractual evidence of the relationship’s duration and renewal terms.

Industry-Specific Regulatory Risks

The Listing Division’s second-round comments will also incorporate guidance from the SFC’s thematic reviews. For example, in a 2024 review of biotech listings, the SFC emphasised that applicants relying on the Chapter 18C or 18A regimes must provide a clear pathway to commercialisation, including a detailed budget for research and development and a timeline for regulatory approvals. The second-round comments will demand a reconciliation of the applicant’s cash burn rate against its stated R&D milestones. If the applicant’s cash runway is less than 12 months from the expected listing date, the Division will require a specific funding plan, often including a binding commitment from cornerstone investors or a bridge financing arrangement.

For a property developer or a real estate investment trust (REIT), the second round will focus on valuation methodology. The Division will request the independent valuer’s report and will often ask for a sensitivity analysis on the discount rate and capitalisation rate assumptions used. The Exchange’s published decision HKEX-LD117-2024, concerning a property developer, explicitly stated that the Division expects the valuation assumptions to be consistent with observable market transactions in the same jurisdiction within the last six months.

The Third Round: Governance, Connected Transactions, and Final Disclosure

The third round of comments is the most tactical. It is issued after the Division has reviewed the applicant’s responses to the first two rounds and has formed a preliminary view on the application’s suitability. The focus shifts to corporate governance, connected transactions, and the clarity of risk factor disclosure.

Connected Transaction Waivers and Annual Caps

For any applicant with significant connected transactions, the third round is where the Division tests the proposed annual caps and the rationale for any waivers. Under Chapter 14A of the Listing Rules, all connected transactions must be conducted on normal commercial terms and must be fair and reasonable so far as the independent shareholders are concerned. The Division’s third-round comments will often request a benchmarking analysis comparing the transaction pricing to arm’s length market prices. If the applicant is seeking a waiver from the requirement to obtain an independent financial adviser’s opinion on a particular transaction, the Division will demand a written justification from the sponsor explaining why the transaction is de minimis or why the connected party’s influence is immaterial.

The annual caps themselves must be supported by a detailed forecast. The Division will ask for a reconciliation of the proposed cap against the actual transaction volume for the previous three financial years. Any proposed cap that is more than 20% above the historical average will trigger a request for a sensitivity analysis and a clear explanation of the growth driver.

Risk Factor Precision and Prospectus Summary

The third round is also where the Listing Division polices the quality of the risk factor section. The Exchange’s 2025 guidance on prospectus disclosure (HKEX-GL124-2025) explicitly states that risk factors must be “specific to the applicant” and not generic boilerplate. The third-round comments will flag any risk factor that is copied from a previous application or that could apply to any company in the same industry. For example, a risk factor stating “the applicant faces competition” will be struck out and replaced with a requirement to name the specific competitors, their market share, and the applicant’s competitive advantages.

Finally, the Division will review the prospectus summary section with extreme care. Under Listing Rule 11.07, the summary must be “fair and accurate” and must not contain any information that is not covered in the main body of the prospectus. The third-round comments will often require the applicant to remove any forward-looking statements from the summary unless they are explicitly qualified with a detailed explanation of the underlying assumptions and risks.

Closing: Five Actionable Takeaways for the Applicant Team

1. Prepare a three-round defence from Day One. The sponsor’s response team should map out the likely questions for each round before the A1 submission, allocating specific personnel to each thematic area—threshold compliance, business model, and governance.
2. Front-load the structural review. Any VIE or PRC regulatory issue must be resolved with a legal opinion and a CSRC filing confirmation before the first-round comments arrive; the Division will not proceed until these are confirmed.
3. Quantify every risk and assumption. If a risk factor or a financial projection cannot be supported by a specific, audited number or a published market study, it should not appear in the prospectus.
4. Benchmark connected transaction caps against historical data. Propose an annual cap that is no more than 15% above the three-year historical average, unless a verifiable growth contract exists.
5. Expect the third round to be a final polish, not a structural fix. By the time the third-round comments arrive, the applicant should have no unresolved threshold or business model issues; the focus should be on tightening language and eliminating generic disclosure.